How to Address Changes in Household Composition in Income Qualification

Published by Thomas Stagg, Tim Zhang on Friday, July 7, 2017

Question: At my low-income housing tax credit (LIHTC) property, we often have changes in household composition caused by adding or removing household members after the initial move-in. Would the unit cease to be treated as a low-income unit if the change in household composition puts the household income over the applicable income limit?

Answer: No, generally, changes in household composition do not cause a unit to stop being income-qualified. However, there are some instances where changes in household composition can lead to compliance issues. This discussion examines the various rules regarding changes in household composition.

Increase in Household Size

According to Chapter 4 of the 8823 Guide: Changes in Family Size: the addition of new member(s) to an existing low-income household requires an income certification for the new member of the household, including third-party verification. For a mixed-income building, the new tenant’s income is added to the income disclosed on the existing household’s most recent tenant income recertification. The unit remains in compliance and the income of the new member is taken into consideration with the income of the existing household for purposes of the available-unit rule. For a 100 percent LIHTC building, the new tenant’s income is added to the income disclosed on the existing household’s original income certification. As long as the next-available-unit rule is complied with, the unit remains in compliance. In fact the 8823 Guide “sees no difference between increased household income and increased household income resulting from the addition of a new member of the low-income household, provided the household is not manipulating the income limitation requirements.” 

Totem Pole Rule

Before we discuss the income limitation manipulation, let’s take a deeper look at the 8823 Guide on changes in household composition. The 8823 Guide states that, “a household may continue to add members as long as at least one member of the original low-income household continues to live in the unit. Once all the original tenants have moved out of the unit, the remaining tenants must be certified as a new income-qualified household unless the remaining tenants were income qualified at the time they moved into the unit.” This is sometimes called the totem pole rule. As long as the totem pole rule is adhered to, there is no prohibition adding members to the original household provided that at least one member of the original low-income household continues to live in the unit.

Don’t Manipulate the Income Limit Requirements

Managers will want to be careful about households adding members shortly after initial occupancy to make sure the household is not manipulating the initial qualification. There is no safe harbor as to how soon the household can add members to the original household after the household’s initial move-in. Many state agencies and management companies view adding members to the original household within six months after its initial move-in to be a red flag. Generally, the applicants are required to disclose any changes to the household composition expected to occur within six months after application. However, unexpected situations occur that may result in changes in household size shortly after move-in. For example, the tenant fell in love and got married with someone within weeks of initial move-in. In this situation, the moving-in of the tenant’s new spouse within weeks of the household’s initial move-in wouldn’t necessarily be considered a manipulation of the income-limitation requirements and the unit would remain in compliance. The rule of thumb is that the property management should act with due diligence and make reasonable judgments in the case when there is an increase in household size right after qualifying the household at its initial move-in. It is a good idea to see if the household would qualify as an initial household with all of the new members. If so, there is no concern that the household addition was purposely done to manipulate income qualification.

To avoid this problem, it is wise to have policies that dictated when household members can be added and gives guidelines as to when household additions may not be allowed. 

Decrease in Household Size

A decrease in family size does not require an immediate recertification of income. The subsequent annual recertification will be based on the income of the remaining household members. However, as mentioned above, care must be taken to make sure that at least one member of the original household still occupies the unit or the remaining tenants will need to requalify the unit. The 8823 Guide states “Once all the original tenants have moved out of the unit, the remaining tenants must be certified as a new income-qualified household unless the remaining tenants were income-qualified at the time they moved into the unit.” Please see the example below:

Tenant A moved into a 60 percent LIHTC unit Jan. 1, 2011, and his income at initial move-in was below the income limit for a one-person household at 60 percent AMGI during Year 1. On Sept. 1, 2011, Tenant B moved in. As we discussed above, B’s income should be certified and added to the existing income certification for purposes of the next-available-unit rule. If the management didn’t choose to requalify A and B together as a new household, the totem pole rule will apply and the unit remains in compliance. On Jan. 1, 2012, at the unit’s subsequent annual recertification, the combined income of A and B is above 140 percent of limit for a two-person household at 60 percent AMGI during Year 2, the next-available-unit rule will apply and the unit still remains in compliance. On May 1, 2015, the original household member A moved out of the unit. B must be certified as a new income-qualified household when A moved out.

If the management choose to requalify A and B together as a new household when B moved in Sept. 1, 2011, then there is no violation of the totem pole rule, since A and B are treated as a new household and the moving in of B is not considered an increase in household size.

Since A and B are requalified as a new household, their income must be below the income limit for a two-person household at 60 percent AMGI when B moved in Sept. 1, 2011. In this situation, A and B are both considered the “original tenants” of the new household “A&B.” When A moved out May 1, 2015, B needn’t to be certified as a new income-qualified household because for the new household “A&B,” A’s moving out is just simply a “decrease in household size” and the next-available-unit rule will apply if the remaining tenant B’s income is above 140 percent of the income limitation applicable to the remaining smaller household size at subsequent recertification.

Summary

Property management should act with due diligence and make reasonable judgments when there is an increase in household size right after qualifying the household at its initial move-in to try to avoid the manipulating the income-limitation requirements. Property managers may want to consider requalifying the entire household at the time of the addition of household members and create a policy that guides when households members can be added to the household.